OTCEI ANNOUNCES NEW INITIATIVES
The OTC Exchange of India (OTCEI) announced two new initiatives today that would enable the Exchange play a major role in the IPO market and create fresh opportunities for new companies, especially in the high growth, knowledge based industries, to get attractive valuations.
OTCEI Managing Director Mr. J. H. Bosco said that the Exchange had initiated steps to form a subsidiary to take up membership of the National Stock Exchange, enabling its member brokers gain access as sub-brokers to the latter's order book. The subsidiary is expected to take membership on the NSE in 3-4 months time.
Mr. Bosco also announced, as part of a drive towards initiating more investor friendly measures, a complete revamp of the Exchange's market making rules to create greater liquidity for stocks listed on the OTCEI and provide more exit opportunities for the investors at all stages. The new market making system will be operational by the 4th week of October and will be integrated with the existing OASIS system, Mr. Bosco added. (See attached summary for details of the market making system).
Commenting on the move to form a subsidiary which would seek membership on the NSE, Mr. Bosco said that given the national reach and depth of current members of the OTCEI, it would now become a more aggressive player as a stock exchange, especially for innovative and startup companies, on a national level.
"The new initiatives are among the first steps that we're taking towards making the OTCEI the ideal exchange for IPOs, especially companies with a focus on Intellectual Capital. The activation of more number of brokers on OTCEI by giving them access to the highly liquid and deep market of the NSE is the first step towards achieving this objective. These two moves together will also create greater incentives for OTCEI member brokers to create a more liquid environment for OTCEI listed companies," Mr. Bosco said.
The new OTCEI subsidiary would become a trading member on the NSE and would be a separate entity from the OTCEI, fulfilling, all the base level entry requirements at NSE.
All OTCEI brokers, who are presently active and those who have all cleared their dues to the Exchange with respect to the various fees (annual/ technology / permitted etc) will be allowed to apply to the subsidiary for registering as its sub-broker to trade on the NSE order book, Mr. Bosco emphasised.
The subsidiary company would follow the exposure limits and other margining systems presently applicable to the NSE members and the sub-brokers would in turn have to follow the exposure limits set by the subsidiary company. All the SEBI norms, as well as the Exchange norms, regarding the sub-broker activities and participation would be applicable to such registered participants, he added.
Emphasising that the Exchange has already begun looking at changes in its systems Mr. Bosco said, "The OTCEI has taken several concrete steps for reviving its Listed Segment and towards this objective, has introduced measures such as weekly settlement, short selling, trading through the advanced OASIS system and the VSAT network. All this will be a boost to the business for the brokers on the Exchange."
Commenting on the new market making rules Mr. Bosco said, "The new system would provide the necessary flexibility for the intermediaries to take up fresh assignments as the possibility of a stock dump has been greatly reduced. Only highly capitalised players would be able to take up market making assignments thereby ensuring quality qoutes in the system and assuring constant liquidity."
"The OTCEI is poised to emerge as the Exchange for new millenium knowledge based stocks. We were the first to introduce the market making concept in India and the new moves will revive the Exchange and enable it to fulfill its mandate as the Stock Exchange of choice for entrepreneurs, the venture capitalists, angel investors and private equity funds operating in India," Mr. Bosco concluded.
Summary of the new Market Making guidelines
Market Makers to have a minimum net worth of Rs. 1 crore.
Introduction of 5% Inventory Bandwidth on the net purchase position, per scrip, for market makers.
The above bandwidth to be followed only for PMM (Principal Market Maker)/ AMM (Additional Market Maker) assignments.
Maximum permissible spread between the buy / sell quotes to be 5%. In case of securities whose market price is less than Rs. 10/-, the maximum
permissible spread between the buy and the sell quotes would be Rs. 1.00.
Market Makers in the new system would be allowed to shortsell.
Quotes to follow the SEBI guidelines on price bandwidth.
The "Tick Size" change or the minimum price interval would be 5 paise.
The order execution priority in the new system would be PMM/AMM/Other MM/Order Book.
Lower transaction costs on trades executed by Market Makers
0.0025% of the traded value for the Dealers
0.0015% of the traded value for the Members
Inventory Bandwith Concept
The present market making mechanism on the Exchange does not provide for a "cushion effect" for the market maker in order to avoid dumping of scrips on him during adverse market conditions. In this context, it is proposed that a ceiling limit on the net inventory ( cumulative buy - cumulative sell ) positions, for a given scrip, be introduced so that the moment a market maker reaches that level, the "bid" side of the market maker's quotation gets disabled.
Hence by compulsion, a Market Maker will not be compelled to pick any more inventory through the Market Making mechanism. However when the net purchase position / quantity falls below a certain limit, the "bid" side of the quotation gets re-enabled / activated automatically. The system being proposed therefore would be some kind of an inventory band (net purchases), in percentage terms, within which a market makers inventory would be allowed to fluctuate.
The inventory band limits in the above system would be as follows :
Maximum inventory level : 5% of the net offer to the public for the scrip
Bid-side Reactivating level : Immediately at or below the 3% of the net offer to the public.
Once the Market Maker reaches the ceiling limit of 5% for a given scrip, the system deactivates the "bid" quotation for the market maker. During the time the market maker's inventory position is lying between the 5% - 3% level, the Market Maker has the choice or the right to put in a "buy" quote, but not the obligation to offer the quote. Upon reaching the 3% level, the system will prompt him to compulsorily offer a "buy" quote.
Note : The term "inventory" being used in the present context basically signifies the difference between the cumulative buy transaction volume and cumulative sell transaction volume for the counter, for a given scrip, at any point of time.
Order execution priority
At present, apart from the tenor of the market making commitment which differs between the various class of market makers, there is no operational difference between them. For example, the Voluntary Market Maker (VMM) for any scrip does not have a binding commitment towards the scrip to provide continuous liquidity. Infact, this aspect gets greatly pronounced with the proposed free entry-exit norms for the members/dealers as VMMs.
In order to address the above issue and also to provide an incentive to brokers to take up PMM and AMM assignments, the Quotes of Market Makers would have priority over the orders placed in the market by other brokers, at any point of time. The order would be executed on the basis of the best price from the investor's perspective. In case the price given by the Market Makers/Members/Dealers are same as that of the orders, then the order execution priority for a trade against the price given by the Market Makers / Members / Dealers would be in the following sequence:
Price remaining same, the order execution priority would be:
Principal Market Maker (Ist)
Additional Market Maker (2nd)
Quotes given by Members/Dealers (3rd)
Order Book (4th)